Why our small businesses are a BIG deal

In the entrepreneur world we hear a lot of talk about entrepreneurs and businesses needing to be “global from day one”. Investors and business commentators lament our lack of large global businesses and say the “three-B” (bach, ‘Beemer’ and boat) mentality of Kiwi business owners is holding us back. In this regard small businesses are often viewed as symbolic of a lack of progress, rather than symbolic of success – the unfortunate by-products of big businesses that “should have been”.

Our sharemarket, they say, is underdeveloped because of this (although I would argue our lack of big businesses is in part due to our preference to invest in property rather than entrepreneurs) and New Zealand is a small nation, with business owners who are content to build small businesses.

But while it’s true that New Zealand needs more globally successful brands bringing us in mountains of foreign cash, there are some very real reasons we need to place more emphasis on valuing and supporting our small businesses and small business owners.

While we often hear statistics asserting New Zealand as a nation of small businesses, such as 97% of businesses in New Zealand having less than 20 employees (which is the current definition of a small business in New Zealand and Australia), these numbers are not the reason why small businesses are important in and of themselves. That’s like saying men are important to humans because nearly half the world is made up of men.

Here’s why small businesses are integral to the health and wealth of our economy and country.

1) Small businesses support healthy towns and communities

If you’re one of the 2.5million-odd people who would rather not live in Auckland, Christchurch or Wellington, you’re only able to do so because of the small business owners willing to take on the risk of bringing you the goods and services you need. Running businesses in smaller towns is risky! It’s a delicate balance between population and competition. Population growth attracts new competitors to the market and just one new competitor could put you out of business.

Similarly, the loss of just one other employer could be enough to put your customers out of jobs and you out of business. We’ve seen in the past what happens to towns built around one big employer, when they get mothballed.

2) Small businesses keep profits in New Zealand

While larger businesses tend to make more tempting targets for international acquisition, thus syphoning profits out of New Zealand and into the pockets of foreign shareholders, small businesses are generally closely held, with profits staying in the hands of New Zealanders.

In turn, these profits are generally spent or invested by said owners, back into the business owners’ local economies and communities. All else being equal, 100 small New Zealand owned businesses sharing profits is generally better for our country than a market being dominated by one large foreign owned company.

3) Small businesses help spread the wealth

Around the world, inequality and the growing wealth gap is becoming a major societal concern, threatening the economic and political stability of local and international economies. Following the GFC, worldwide protests brought the world’s increasingly skewed distribution of wealth into focus for a new generation and as recent figures have shown, the disparity is only speeding up.

While globally, the 8 wealthiest individuals own as much as half of the rest of the world combined, the wealthiest 10% of individuals here in New Zealand own half of the country’s wealth. New Zealand is undoubtedly one of the greatest places in the world to live, but we are in danger of becoming a nation divided, with the New Zealand experienced by the wealthy minority being quite different to the New Zealand experienced by those at the other end of the spectrum.

While many are quick to point the finger at capitalism as the culprit and cause of inequality, the irony is that capitalism is also the best antidote, and small businesses have a vital part to play.

What do I mean by this? With big businesses, profits are generally earned by extracting revenue from a very wide catchment, but get channelled back through a narrow funnel of stakeholders, leading to a focused accumulation and concentration of wealth.

Take “The Warehouse” for instance. While we love shopping for bargains at The Warehouse, and appreciate how it has helped bring prices down for the enjoyment of all New Zealanders, how many small businesses has its 90 odd stores helped push under in various towns and cities over the last 35 years? Where once a small town may have needed 20 or 30 different businesses to supply the goods and services found in the typical Warehouse store, with revenue and profits being shared amongst many town business owners, who in turn spend that money in their local economies, that revenue now goes to one company, with the profits leaving town as dividends for The Warehouse group shareholders.

And who can blame us “rational consumers”? We all want to get the best value for our money. We don’t want to pay “more than we have to”. But if we don’t want the small towns we live in to disappear, or to be taken over by large corporates and international chains, we need to do two things.

First, as a consumer, be mindful of where you spend your money. Think global by all means, but buy local and locally owned! And be proud if you have to pay a little extra. Remember, big businesses will lower their prices just enough to undercut the small businesses – they are not incentivised to lower their prices any more than is absolutely necessary.

Secondly, as a business owner, get out and compete! If you can’t beat the big guys on price, beat them on service. Or experience. Or the fact that you are locally owned and know your customers by name.

Find a way to differentiate yourself and give people a reason to spend with you.

Be unique

Go niche and go “deep”

Go fair trade, sustainable, ethical

Use only local produce

Customise or go bespoke

There is always a market for those who are not solely price driven so give buyers in your town options on who they can spend their money with. And when it comes to spending your own money, see the previous step!

Until consumers and suppliers understand that we are both responsible for “making small town New Zealand great again” nothing will change.

4) Small businesses are leaders in innovation

While Statistics NZ reports that larger businesses spend the most on R&D, I do not take this as an indication that the majority of innovation is done by big business. Rather that our attempt to measure spending on R&D as a sign of “innovation” is a bit inadequate.

In the US, small businesses have been shown to be responsible for 16 times as many patents per employee than large businesses. While the definition of a small business in the US is slightly different to ours (businesses that employ less than 500 employees versus less than 20 employees here in NZ) I would not be surprised if there is a similar trend here in New Zealand.

Indeed based on my observations, and those of others in the entrepreneur community, my gut would tell me that most innovation happens on the fringes, by small business owners unhampered by the corporate bureaucracy that often hinders progress, and that rewards playing it safe (“don’t lose our shareholders money!”), rather than risk taking.

As a result, large businesses often prefer to innovate by acquiring the smaller, nimbler businesses in question, sitting back, watching the fireworks, and swooping in when the smoke has cleared.

5) Small businesses are the genesis of big business

But the main reason we need to do more to support small business owners is that in almost all instances, small businesses are the breeding ground for big businesses. All big businesses once started out as a small business (some even with only small ambitions when they started out) and big business builders often cut their teeth building small businesses.

That is not to say small business owners shouldn’t be encouraged to think bigger when they start their businesses (I would suggest that indeed, most small business owners actually start out with very big dreams). But that simply relying on the process of self qualification, the process of natural selection through business Darwinism where only the strongest will survive, in the hope that somewhere out of the milieu of the small business soup will emerge enough businesses that will miraculously kick on to become large businesses, is very short sighted.

How many potential world beaters have fallen by the wayside because the entrepreneur didn’t have the business skills to see their innovation flourish? How many ideas that could set the world alight have burnt out because of a lack of advice, connections or resource for those endeavouring to break through the small business barrier?

How many thousands of business owners have pursued their business building dreams for years, bootstrapping it as best they could on their own, and who not for the lack of trying inevitably decide that it’s just too hard, that national or international domination is out of reach, and settle instead for a small privately held business that provides them with a good income and a nice lifestyle.

How many Xero’s, or Buckley Systems, or Rocket Labs have gone begging because the owners didn’t know how to get them “investment ready”?

New Zealand is not short of innovators or world beating ideas – we are short of innovators who are also skilled entrepreneurs and business builders.

And in the increasingly competitive and fast moving global marketplace of the future, it will be even more important for our country (spearheaded by Government), to invest more, in developing policy, incentives and support for small business owners.

Small businesses are not the poor, unfortunate “also-ran” cousins of big businesses. They are the genesis of big business.

Richard Liew is founder and editor of NZ Entrepreneur magazine and Espire Media.